With the travel industry grounding to a halt in the wake of the coronavirus outbreak, airline stocks have been hit hard. EasyJet (LSE: EZJ) shares are a great example.
Back in mid-February, EZJ shares were changing hands for over 1,500p. Today, however, you can buy the shares for less than 600p – around 60% lower. Is this sharp drop in the share price a buying opportunity for long-term investors? Here are my thoughts.
Looking at recent announcements from easyJet, it’s fair to say that the near-term future looks pretty bleak.
For starters, the company announced yesterday that in response to the unprecedented travel restrictions imposed by European governments, it has grounded its entire fleet. It doesn’t take a rocket scientist to realise that that is a huge problem for the airline. The company added that, at this stage, there can be “no certainty” of the date for restarting commercial flights. Again, that’s quite alarming.
It also said, in an update on 16 March, that European aviation faces a “precarious future”, and that there is no guarantee European airlines will survive what could be a long-term travel freeze and the risks of a slow recovery. It added that the future of the industry will ultimately depend on the level of support provided by governments across Europe (although the group still paid out £174m in dividends on 20 March, which has angered a lot of people).
What this news ultimately means is that there’s an enormous amount of uncertainty in relation to the investment case for easyJet shares right now. With no planes in the air, no guidance as to how long the travel freeze will last, and no idea what earnings for FY2020 will be (the group recently suspended its guidance), investors really are flying blind.
Could easyJet go bust?
It’s worth noting that easyJet says that it has a strong balance sheet, which includes a £1.6bn cash balance and aircraft worth over £4bn. It also says that it has an undrawn $500m revolving credit facility, a slot portfolio that is “large and valuable,” and that it has no debt refinancing due until 2022. This suggests that the company is unlikely to go bust tomorrow.
Are easyJet shares worth buying?
Weighing everything up though, I don’t think easyJet shares are worth the risk right now. Yes, the share price has fallen a long way, but there is an awful lot of uncertainty at present. As my colleague Harvey Jones said yesterday, buying airline shares now is a “wild, desperate” punt. In my view, the overall risk/reward proposition offered by the FTSE 100 stock is not yet attractive enough.
Of course, if the easyJet share price keeps falling (which I think it may well do), the risk/reward profile of the stock could improve. However, for now, I’ll be leaving easyJet shares alone and focusing on companies that are still ticking along nicely.
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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.